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Japan LNG buyers, Qatargas 1 end five-year price dispute: sources

Tokyo (Platts) – 19 June 2009

Japan’s top LNG importers have struck a landmark deal with the operators of the Qatargas 1 LNG project that ends a five-year old dispute over the price of gas supplied into Japan from the project. sources close to the talks said this week.

The consortium of eight Japanese power and gas utilities, which import a combined total of more than 6 million mt/year of LNG from Qatargas 1 under long-term contracts that last until 2021, agreed to new pricing terms that will end demands from the supplier to establish a direct link between the value of oil and the price paid for LNG — “oil parity” pricing that Japanese importers have long resisted.

It provisionally tied contract prices to official Japan LNG import prices as part of the settlement — an important concession because LNG import values include some spot contracts. As part of the new price, the consortium will include a price element tied to the value of LNG established by the Japan Customs Cleared monthly price for LNG, a volume weighted average price of all of the imported LNG that is published one a month by Japan’s finance ministry, sources said.

In return, consortium will retain some protection from strong spikes in oil prices in the new, retro-active pricing formulas agreed with Qatargas 1. But they will lose some of the absolute protection established in Japan’s well-known “S” curve contract formulas, said the sources.

But the deal will see the consortium revert to a traditional formula based on official crude prices with payments from May of this year onwards, meaning the bigger issue of moving away from oil-linked pricing remains open for another day.

The deal means the Japanese consortium will not have to pay its Qatari supplier any extra money for LNG deliveries made between July 2004 - August 2007. But importers have agreed to make additional payments by the end of June to cover LNG supplied between September 2007 and December 2008. The money will top up Qatargas 1 for the difference between what the consortium actually paid, and what they would have paid using the new formula.

Under the new pay deal, the Japanese would pay around $8.60/MMBtu for LNG term supplies when the Japan Customs Cleared crude price stands at around $70/barrel, sources said.

By contrast, in September-October 2007 the Japanese consortium paid around $7.40/MMBtu for LNG term supplies, a time when the JCC price was at around $70/b, they said.

Between November 2007 and December 2008, the Japanese consortium paid their LNG import prices by using Japan Customs Cleared LNG price for two months prior to subjected months as a provisional payment, sources added.

CRUDE RALLY PUT “S-CURVE” STRUCTURE UNDER PRESSURE

The November 2007-December 2008 payments — the first known informal deal to use average Japanese LNG import prices as a basis for Japanese term contract settlements — led to payments of between $7.90/MMBtu for deliveries in November 2007 and a peak of around $14.50/MMBtu in December 2008. Those values were derived from average JCC LNG prices set two months before.

Spokes people at all eight Japanese consortium members — Chubu Electric Power Co., Tokyo Electric Power Co., Tohoku Electric Power Co., Kansai Electric Power Co., Chugoku Electric Power Co., Tokyo Gas, Osaka Gas and Toho Gas — all of declined to comment on the deal. Qatargas officials were unavailable for comment Friday owing to the weekend in the Middle East.

The original price formula set up between Qatargas 1 and the consortium set with the seller ties LNG prices to the monthly JCC crude oil import price published by the ministry of finance. Through caps and floors, it effectively stopped LNG prices fro rising when crude prices rallied over $30/barrel, and stopped LNG prices from falling if they fell below a set level.

That structure came under strain when oil prices moved sharply upwards after 2004, peaking in July 2008 in the high $140s. Sellers of LNG around the world have pushed hard for complex structured contracts like S-Curve agreement to be redrawn or ditched entirely.

Meanwhile, the Japanese consortium has also agreed to pay for their LNG imports from Qatargas 1 over January-April 2009 using the JCC LNG import prices, sources said.

This suggests that the Japanese consortium would pay between $10.9/MMBtu and $15.1/MMBtu for those deliveries, by using the average LNG import price of $564.3/mt for February 2009 and $782.9/mt for November 2008.

The consortium has also agreed on a provisional price formula, using a traditional formula linking to the JCC price, for imports beyond May, sources said. Under the provisional agreement, the buyers would pay around $8.1/MMBtu for their LNG imports when the JCC price hovers at around $50/b, sources said.

The provisional agreements for Japan’s LNG imports from Qatar beyond January 2009 are yet subject to review for final settlements, and it was not immediately clear when the final settlement is expected, sources added.

Qatargas is a joint venture by state-owned Qatar Petroleum (65%), Total (10%), ExxonMobil (10%), Mitsui (7.5%) and Marubeni (7.5%).

Takeo Kumagai, takeo_kumagai@platts.com Similar stories appear in Platts Power in Asia.

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